PAUL MICHELMAN: Hello. I’m Paul Michelman from Harvard Business Digital, and I’m delighted to be joined today by Tom Davenport. Tom is the co-author of the Harvard Business Review article “Reverse Engineering Google’s Innovation Machine,” along with fellow Babson professor Bala Iyer. Tom also writes the Next Big Thing blog on harvardbusiness.org. Tom, thanks for joining me.

TOM DAVENPORT: Happy to be here.

PAUL MICHELMAN: So Tom, we’re going to get inside your thinking about Google, what makes it so special and such an effective innovator today.

TOM DAVENPORT: Going to reverse engineer my thinking?

PAUL MICHELMAN: We are indeed. You posit in the article that, while there is plenty that makes Google a unique institution, there’s also a great deal about how they’re organized, how they innovate, that other institutions can learn from and apply themselves. So let’s begin at a high level. What is it that makes Google such an effective innovator?

TOM DAVENPORT: Well for me, Paul, they’re really the quintessential first even 21st century knowledge-based organization. In a way, it’s not surprising since they’re one of the few big companies to have been started in the 21st century. But the way they manage their people, the way they hire, the way they try to create a stimulating intellectual environment, the way they try to enhance the productivity of their knowledge workers by giving them great food to eat for free whenever they want it — it all adds up to, I think, a really distinctive combination of traits that produces a high volume of high quality ideas.

PAUL MICHELMAN: So let’s get inside that a little bit. From a distance, those of us who observe Google, it’s always shrouded a little bit in mystery. Maybe not on purpose. But out of it spin these incredible successful products. They blew away search. They blew way online advertising. What specific parts of the innovation machine should we be focusing on if we want to pull things out and apply them for ourselves?

TOM DAVENPORT: Well, as we say in the article, you can’t emulate everything that they do. It’s not easy to say, OK, I’m going to create a category-killing search algorithm. I’m going to master the world of online advertising. That’s not really useful advice. But I think a number of the things that they do are emulatable by other organizations. The idea, for example, of building a platform that scales readily. Creating an environment where you can move easily from prototype to finished product. Encouraging lots of incremental innovations, and testing them in more or less the production environment in which they’ll run, so you can see should we actually adopt this thing?

And then a lot of the ideas about how to treat knowledge workers. How to extract their maximum intellectual value. How to make decisions with analytics and opinion markets and so on. That’s something that virtually any organization can do, and I think could fairly easily be emulated, although a lot of companies don’t.

PAUL MICHELMAN: When I hear you talking about the platform pieces, which are very structured processes that they go through, it feels like that’s something that a software manufacturer, maybe a hardware manufacturer might emulate. But can companies from other industries that are unrelated to what Google does learn something from that?

TOM DAVENPORT: Well, certain aspects of it they could certainly recreate. The whole idea of testing. Frankly, it’s relatively easy to do testing in a web-based environment, because you can create different web pages and see how people respond. But I’ve worked with a number of other companies who were quite enthused about testing who are retailers or financial services companies who, before they try things out across their entire branch network or their entire store network, they create a test environment, a control group, and see what really works. So certainly that whole idea could be easily emulated by a lot of other kinds of companies.

PAUL MICHELMAN: Google has an incredibly high tolerance for failure. Or at least, so it seems. Doesn’t take many big hits. And in fact, they haven’t had that many big hits. Their hits have just been enormous. How do you go about building a higher tolerance for failure? What do we learn about that, and how to bring that into our organization from Google?

TOM DAVENPORT: Well, I think this is a cultural trait. You don’t have to build a lot of exotic software, or create a million computer infrastructure, to use that attribute of Google at all. This is an old idea that, if you’re going to be successful at innovating, you’re going to fail most of the time. And Google just seems to have acknowledged it from the very beginning. And they have a pretty clear way of testing what’s successful and what’s failing in terms of their– does their vast user base adopt this, and like it, and use it successfully?

I think this answer’s been around. We just haven’t seen that many companies actually adopting. It has to do with a certain humility, I think also, on the part of the senior management team. We don’t know the answer. Nobody knows the answer. We know we’re going to try a lot of things, and a lot aren’t really going to work.

PAUL MICHELMAN: Now, it seems to me that one of the aspects of the way they test is they don’t fear putting ideas in front of their customers only to have them fail and disappear. Is that accurate?

TOM DAVENPORT: I think it’s definitely accurate. At any given time, there are new features and functions being tested. Lots of things in beta. In fact, I think one of the open questions about Google is whether the customer base really has enough attention to pay to all of these innovations coming out. Google throws a huge mass of stuff at its customer base, and even the senior management team doesn’t know how many products the organization has. Eric Schmidt admitted it at one point. So I think one of the questions over the long run is, can the customer base really absorb all of this innovation being thrown at them?

PAUL MICHELMAN: So for some senior leaders at other companies, the kind of disconnect, it seems, that Eric Schmidt has with what’s actually going on the organization might be kind of shocking. But it seems really consistent with what you write about, that Google’s culture is about chaos.

TOM DAVENPORT: It is. It’s a controlled form of chaos, and there are a lot of well-defined processes for innovation. But the sense is, if we can track everything that’s going on, there’s probably not enough going on. If we can track all of the innovations that are happening, then we’re probably being overly controlling. So there is a feeling. Shona Brown, a very senior executive at Google, actually wrote a book about this, A Strategy as Structured Chaos, and they’ve embodied it into a lot of their organizational processes.

PAUL MICHELMAN: Is there a way organizations can test chaos? That sounds ridiculous. But it’s unlikely that companies are going to immediately adopt the kind of innovation model that Google has, particularly when it comes to the hands-off idea. Can you create small experiments around chaotic environments?

TOM DAVENPORT: Well, I don’t know. I mean, chaos is sort of something that you either buy or you don’t, I think. I’m not sure you can be chaotic on a really small scale. But in a way, what you describe is what Google does. They create lots and lots of small tests, and the overall environment may appear to be chaotic from the outside, and no one person is kind of pulling all the strings. But I think the overall effect is pretty well-controlled in a sense. They don’t end up introducing a lot of ideas that don’t make sense. They have a pretty good track record of introducing features and functions and product offerings that are desired by the marketplace.

PAUL MICHELMAN: So clearly, what makes this work at Google is this is happening at the individual level. Which means that employees have really bought into the way Google does what Google does. But how does the organization support that an ongoing basis?

TOM DAVENPORT: Well in fact, I’d go even further and say it’s what attracts a lot of these people to Google. On the few occasions when I’ve actually talked to Google employees, but certainly you see it on all the blogs and the communications available in the world from Google, they find it very appealing that even the lowliest engineer, the new hire, can pretty quickly have an impact, and can quickly inject their code, their idea for a new way of doing things, into the way the organization works. There’s a certain openness. It doesn’t matter if you’re in charge of product development, or a really senior engineer. It’s a technocracy in the since the best idea wins. And that, I think, attracts some of the best engineers, and computer scientists, and economists, and statisticians in the world.

PAUL MICHELMAN: So as we sit here and talk about everything that Google does well, there’s one thing that’s not going so well for them, and that’s their stock price, which has taken a pretty big hit the past year. Does that throw any caution into this conversation?

TOM DAVENPORT: Well, I think they’re not particularly worried about it. They weren’t particularly gloating and saying, oh, at last our true value is revealed, when they were up above $400 a share. And I don’t think they’re worried about it particularly now. They’re in this for the long haul. They don’t look a lot at day-to-day fluctuations. And I think if your basic model is monetizing consumer intentions as expressed through their online behaviors, if your audience is less interested in buying stuff, it’s going to mean that you’re going to have some downturns. I suspect that in this economy, not only are we not buying as much, we are not even clicking with the idea of buying as much. And that’s going to hurt them a bit. But over the long run, I don’t think they’re worried, and I’m not worried either.

PAUL MICHELMAN: Tom, I wanted to ask you about how you pulled the article together. You note in the piece that this isn’t based on deep field research. You didn’t spend months inside Google observing what they do. Rather, you do this from the outside. So, why should we buy all this?

TOM DAVENPORT: We did try. We approached several executives with the idea of interviewing them. They declined to participate.

My eight co-author, Bala Iyer, is kind of a long-term Google stalker and has been following their external activities for quite a while. I had been out there, actually. They were nice enough to talk to me about their analytical orientation for my book, Competing on Analytics.

And I tried even more. I had done my interviews. I was in the Googleplex. They have a nice courtyard in between buildings. Somebody was demonstrating a solar car, and Sergey Brin was paying a lot of attention to this demonstration. So he was kind of walking back to his office, and I, I thought, nicely accosted him. I wanted to ask him about his analytical focus. Boy, what a deer in the headlights look I got. He kind of scrambled away. I thought the security police would be appearing very quickly.

But fortunately, there’s so much out there about Google. The employees blog all over the place. There are authorized blogs, unauthorized blogs. It’s relatively easy, I think, to look from the outside and see what’s going on there.

The good news is, just after the article came out, we got an email from a Senior Vice President of Products. He said, spot on. That’s exactly what I would have said about innovation at Google. So we realized we didn’t screw it up too badly.

PAUL MICHELMAN: OK. Tom Davenport, thank you very much.

TOM DAVENPORT: My pleasure.

PAUL MICHELMAN: To read more of Tom’s ideas, you can visit his Next Big Thing blog at harvardbusiness.org.